A Brooklyn-based startup named Payfully might become the next frontier in lending. The company has built a platform that provides gig-economy entrepreneurs with instant lines of credit based on potential earnings.
Payfully’s platform provides Airbnb hosts with loans using future bookings as collateral. It works like this when an Airbnb host books a future guest, Payfully advances a loan based on the amount booked. Then when Airbnb pays the host for the short-term rental; Payfully deducts the amount of the loan from the host’s bank account.
Payfully is Taking Advantage of Flaws in Airbnb
The unicorn is hoping to cash in on two big flaws in Airbnb’s business model. Many hosts need money to cover expenses like cleaning, repairs and management, but they lack cash flow. Payfully provides some cash flow based on future bookings.
The other flaw is the difficulty that gig economy entrepreneurs have getting credit or loans. Some of them have poor credit scores; or no means of demonstrating future cash flow, because all the data is in Airbnb. Since many Airbnb hosts are people having economic difficulties, quite a few of them have trouble accessing traditional sources of business capital such as bank loans and credit cards.
Payfully makes its lending decisions based upon Airbnb data. That way it makes loans to those with a track record of making of money on Airbnb. If the model works as advertised it will be able to identify potential borrowers with strong cash flow but poor credit ratings.
Potentially a Huge Market
The market for Payfully’s loans is potentially vast; Airbnb had 60 million users in February 2016, Expanded Ramblings reported. The New York Times’ Deal Book reported that Airbnb business from Chinese travelers alone increased by 700% over the last two years.
The revenue stream that Airbnb is creating is also massive; Statista estimated that Airbnb grossed $451.43 million in New York City in 2015 and has the potential to generate $805.32 million in the Big Apple by 2018. If it were to get just 5% of New York Airbnb hosts as borrowers; Payfully would have a loan volume of $22.57 million in one city alone.
Not surprisingly, Payfully has already attracted investment it raised $300,000 in convertible notes in its first round of funding on June 6, 2016, Crunchbase reported. If Airbnb’s valuation is anything to go by, Payfully should have no problem raising a lot more money.
Airbnb itself is now valued at $30 billion by unidentified sources on Wall Street and the company was recently able to raise $1 billion in debt, Deal Book reported. If true that makes, Airbnb the second most valuable unicorn in the USA behind Uber.
Hard Money Lending in the Gig Economy
Payfully’s business model is hardly a new or revolutionary one; it is simply a hard money or cash-flow lender. Such lenders advance businesses loans or lines of credit based upon cash flow.
Hard-money loans are popular because they usually involve little or no paperwork and no credit-check. That means cash can be advanced quickly which is often a matter of life or death for a startup. Many small businesses and startups rely on hard-money lending for survival or emergency finance.
The explosion of the gig economy and the difficulty in getting traditional bank loans is making hard-money lending big business these days. American Express (NYSE: AXP) has launched its own lending platform; Working Capital that offers small businesses loans of $1,000 to $75,000 with ninety day terms.
PayPal’s (NASDAQ: PYPL) own working capital program has loaned 60,000 small and medium sized businesses $2 billion over the past three years, PYMENTS.com reported on July 8. If PYMNTs numbers are correct the program grew by $1 billion in just eight months;’ PayPal had made $1 billion worth of loans by October 2015, and $2 billion by June 2016.
The loans are based on merchants’ sales volume, PayPal’s general manager of business Darrell Ash told PYMTS.com. PayPal can now process some of those loans in as little as five minutes.
PayPal’s success with loans certainly bodes well for Payfully which is trying to apply a similar business model in the growing short-term rental field. If it succeeds with Airbnb, Payfully would certainly be in a position to create similar products for other Gig Economy entrepreneurs including Uber drivers and Upwork writers.
Gig Economy Lending is Big Business
Some other companies are trying to cash in on this growing field as well, including Uber itself. Uber itself is making car loans to drivers through a subsidiary called Xchange Leasing LLC. Xchange received a $1 billion line of credit from investment bankers led by Goldman Sachs (NYSE: GS) in May, Bloomberg reported.
Xchange works by automatically deducting the lease payments from the driver’s Uber earnings. Drivers also put up a $250 cash deposit and have the right to return the car after 30 days with no other obligation.
Gig economy lending has become big business with potentially massive revenue flows as the largest player in the game demonstrates. China’s Ant Financial is the second most valuable unicorn in the world with an estimated valuation of $60 billion, The Wall Street Journal reported. Ant is the Alibaba Holdings (NYSE: BABA) spin off that operates Ali Pay. One of Ant’s main businesses is making loans to 20 million small businesses and entrepreneurs through subsidiaries MyBank and Ant Micro Loans.
If it plays its cards right Payfully might become a major player in Gig Economy Finance. Airbnb hosts provide the startup with an ideal market for lending products. What works with them might work elsewhere and help Payfully grow into a major lending operation.